The research and development (R&D) tax credits scheme has been a staple incentive amongst companies investing in innovation for over 20 years. The scheme provides in-profit companies a generous tax liability reduction and loss-making companies much-needed cash injections.
However, recent changes in the UK government's policy regarding R&D tax relief have caused a stir in the industry.
- HMRC estimated that £469m was lost through fraud and error in its two R&D schemes in 2021-22, equivalent to 4.9% of Corporate Tax R&D reliefs.
In our view, it appears that the Government has had a knee-jerk reaction to this revelation and has launched a direct push to reduce the high level of fraudulent claims. To achieve this reduction, the scheme benefits available to small and medium-sized enterprises (SMEs) have now been lowered which will in turn decrease the volume of claim submissions. This gives the impression that HMRC needed to secure more time to effectively monitor the scheme at its current capacity and identify companies or advisers that are taking advantage.
It is advised that companies should keep detailed records of their R&D activities. There have been reports online of HMRC sending nudge letters to claimants and it’s possible that a company may receive a letter if there is a discrepancy in their financial or technical reports. If HMRC is not convinced that a company’s claim is legitimate, or that genuine R&D activity has taken place, then an enquiry could be opened in which a company’s previous claims could be scrutinised.
Enquiries can last for long periods of time - sometimes months or years - which can be incredibly disruptive for all involved and another reason why it is incredibly important to work with an experienced, reputable adviser that offers enquiry defence at no extra cost. Despite these concerns, the fundamental principles of the scheme remain the same: if you are carrying out qualifying R&D activity under the scheme guidelines, you are entitled to this relief.
Is it ‘risky’ to claim R&D tax relief?
The controversy around the R&D tax relief changes has created uncertainty among many companies of all sizes that rely on this scheme to invest in innovation and reduce tax liability. Some companies may worry that their claims may be under the microscope, however, if companies are carrying out qualifying R&D activities, they are entitled to this relief and should not be deterred from claiming.
It is important to note that for claim submissions post April 2023, a director must sign off the R&D claim and confirm its contents. Due to the complexity of the R&D guidelines, choosing an expert adviser with a proven track record is the first step to creating a robust claim. An experienced adviser will be able to efficiently translate your company’s technical advancements into supporting documentation and break down the financial areas of your R&D investments into a format that both you and HMRC can understand.
Aside from the rate adjustments to both R&D expenditure credit and SME schemes that came into place on expenditure after April 2023, the changes do not affect the basic eligibility criteria for R&D tax relief. Companies can still claim relief for qualifying R&D activities and claiming R&D tax relief can provide companies with valuable funds to reinvest back into their organisations, promote innovation, and support the Government's objective to increase productivity and promote economic growth through increased R&D expenditure.
How can I be confident that my claim is robust?
HMRC has announced that from August 2023, all claimants will have to provide a basic level of technical detail to support their claim. This accompaniment will require focused cost details and, depending on the number of projects that a company undertakes, it will need to be ascertained how many projects will need to have the full detail provided. This could result in extra workloads for companies who need to record multiple projects while seeing a reduced level of benefit.
While the recent policy changes may have caused some concerns among companies, the fundamental principles of a successful claim remain the same. By working with experienced advisers, investing time in robust tracking and documentation practices, and ensuring compliance with guidelines and regulations, companies can continue to benefit from the scheme and re-invest into innovation year-on-year.
The qualifying criteria for the R&D tax credit scheme are broad, and recent scrutiny from HMRC means that claimants need to ensure they have a robust process in place.
Gateley Capitus has a team of specialists that can review existing processes and provide tailored advice to ensure that your company has a legitimate claim.